(the above breakdown is of the financial statement of june 30 and shows the current working capital)

Jake Marley is negotiating with the bank for a $200,000, 90-day 12% loan effective July 1 of the current year. If the bank grants the loan, the proceeds will be $194,000, which Marley intends to use on July 1 as follows: pay accounts payable, $150,000, purchase equipment $16,000 and add to bank balance $28,000

The bank loan officer asks Marley to prepare a forecase of his cash receipts and cash payments for the next 3 months to demonstrate that the loan can be repaid at the end of September.

Marley has made the following estimates which are to be used in preparing a 3 month cash budget: Sales (all on account) for July $300,000, Aug $360,000, Sept $270,000 and Oct $200,000. Past experience indicates that 80% of the receivables generated in any month will be collected in the month following the sale, 19% will be collected in the second month following the sale and 1% will prove uncollectible. Marley expects to collect $120,000 of the June 30 receivables in July and the remaining $40,000 in August.

Cost of goods sold consistently has averaged about 65% of sales. Operating expenses are budgeted at $36,000 per month plus 8% of sales. With the exception of $4,400 per month depreciation expense, all operating expenses and purchases are on account and are paid in the month following their incurrence.

Merchandise inventory at the end of each month should be sufficient to cover the following months sales.

INSTRUCTIONS:A. Prepare a monthly cash budge showing estimated cash receipts and cash payment for July, August and September and the cash balance at the end of each month. Supporting schedules should be prepared for estimated collections on receivables, estimated merchandise purchases and estimated payments for operating expenses and accounts payable for merchandise purchases.

B. On the basis of this cash forecast, prepare a brief report to Marley describeing whether he will be able to repay the $200,000 bank loan at the end of September.

Related Questions in Basic Finance

STARZ INC pays a constant dividend of $16 for next 18 years then will stop paying dividends forever. If investors require a return of 8.3% on this stock, what is the value of the STARZ stock? Write in the value with two ...

The following appears in the 2000 10-K of International Business Machines: The company employs a number of strategies to manage these risks, including the use of derivative financial instruments. Derivatives involve the ...

1. Why has real estate often been a key factor in corporate restructuring? 2. Why might refinancing be considered an alternative to a sale-leaseback? 3. What factors might cause the highest and best use of real estate to ...

Cortez art gallery is adding to its existing buildings at a cost of $ 2 million. The gallery expects to bring in additional cash flows of $ 520,000, $ 700,000, and $ 1,000,000 over the next three years. Given a required ...

A property is expected to have NOI of $100,000 the first year. The NOI is expected to increase by 3 percent per year thereafter. The appraised value of the property is currently $1 million and the lender is willing to ma ...

1. What is the goal of a media partnership? 2. Name and describe six basic emergency management audiences. 3. What three factors do DHS and its state and local partners need to address to improve its communications with ...

Make a list of some of the factors in your life that change from one day to the next. Possible examples include your mood, health, environment, schedule, obligations, successes and failures, and the quality of your socia ...

Altman's bankruptcy prediction model places a coefficient of 3.3 on the earnings before interest and taxes divided by total assets variable but a coefficient of only 1.0 on the sales to total assets variable. Does this m ...